The Fed's Toolbox

In this lesson, students learn that the Federal Reserve System uses its monetary policy tools to influence the level of reserves in the banking system. Students participate in a simulation to demonstrate how the Fed uses open market operations to achieve its dual mandate of price stability and maximum employment. Students also learn about other monetary tools: the discount rate, reserve requirements, and interest on reserves—a recent monetary policy tool. Finally, students apply their knowledge of monetary policy to suggest possible Federal Reserve policy responses to proposed economic conditions.